CO2 crisis: stocks to watch as CO2 shortage threatens food and drink sectors

A shortage of CO2 supplies is threatening food and drink producers in the UK and Europe, and it could have a knock-on effect on others including supermarkets, pubs and restaurants. Why is there a shortage in food-grade CO2, what’s the potential impact and which stocks could be affected?

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Source: Bloomberg

A shortage of CO2 in the UK and Europe is beginning to take its toll. As companies and politicians race to figure out the scale of the problem and how to tackle it we have a look at which sectors might be affected and which stocks could be worth monitoring over the coming months.

Why is there a CO2 shortage in the UK and Europe?

One of the main feedstocks used to produce food-grade CO2 is ammonia, which is also used to produce fertilisers for the agricultural industry. Peak season for ammonia production for fertilisers occurs between August and March and many producers then start to roll-out maintenance work from April onwards.

Unfortunately, this coincides with the start of the peak season for soft and alcoholic drink producers as the weather improves. While drink producers have struggled to source ammonia during this time before (as recently as 2015), the market has adjusted to this seasonal move in demand. Trade publication Gasworld, which first reported the shortage last week, said the timing of seasonal maintenance work had been compounded by low ammonia prices coupled with higher natural gas prices (which is used to produce ammonia), squeezing margins.

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The British Beer and Pub Association (BBPA) added unexpected equipment failure to the problem in the UK, particularly at one of the two major national producers of bulk CO2.

With ammonia also being imported from beyond Western Europe, European producers are being encouraged to prolong shutdowns and save their resources for when prices rise. Pressure has also come from the demand side, with the better-than-expected weather and the hype of the World Cup having helped drinks sales both on and off-trade.

Gasworld reported that at least five major CO2 plants had gone offline in quick succession across Northern Europe, and said the UK looked to be particularly vulnerable with only one big plant still in action.

How long is the CO2 shortage expected to last?

Supply is running out and it's pretty tight for some people. We don't know when supplies will be back up. We've been told it could be about a month,’ – British Meat Processors Association (BMPA) deputy director Fiona Steiger.

The impact of the shortage has not yet been fully understood and it is not clear how long it could last. The shortage is expected to continue through the rest of June, with many forecasting it could last for a month or two, with some predicting longer.

The BBPA said in a statement to its members: ‘We understand that the shortage may last for at least the next few weeks and that one supplier has already been in contact with their customers to notify them of force majeure’.

The longer the shortage continues the bigger the impact it will have on any existing inventory being held by companies, and lead to higher prices that could be passed on to consumers. The British Poultry Council states its members tend to hold only two weeks’ worth of CO2 supply in a ‘best case’ scenario (and just one day’s supply at worst), suggesting it will not take long for any shortage to be felt.

How has government and industry responded to the CO2 shortage?

The UK government held emergency talks with the food industry last week but no official response has been made as of yet.

The Food and Drink Federation claimed much of the UK’s £112 billion ‘farm-to-fork supply chain’ would be impacted by the shortage, while the BBPA said it had already started to hit beer production. Meanwhile, the British Poultry Council has warned up to 60% of poultry processing plants could have to shut shortly.

Which stocks could be impacted by the CO2 shortage?

‘CO2 is used widely throughout the food and drink supply chain and we are therefore engaging with members on the matter to establish where there are concerns or issues. We are also speaking with a number of government departments in order to convey these views and ensure that any response is fair, proportionate and well-managed,’ – UK Food and Drink Federation.

Food and drink producers are among those to be immediately affected by the shortage in CO2, which is used to carbonate both soft and alcoholic beverages and also to slaughter livestock. There is already evidence that the problem has spread to food and drink retailers, with supermarket shelves bare of some products and pubs struggling to get their hands on certain beers.

CO2 producers: Air Liquide, Praxair, Linde and Air Products and Chemicals

The Gasworld report stated all the major suppliers of liquid CO2 had felt the impact of the lack of CO2 supply, including Air Liquide, Praxair, Linde, and ACP Europe, the last of which was acquired by Air Products and Chemicals in February.

Fizz to flat: drinks producers threatened by CO2 shortage

Those producing carbonated soft and alcoholic drinks are bracing for a CO2 shortage. The crisis has already hit even the biggest players, with Coca-Cola Great Britain (part of the Coca-Cola Co) having ‘temporarily paused’ some production as a result. Although, it said supplies had not yet been affected. 

AG Barr produces drinks like Irn-Bru and Rockstar from sites in the UK. The company lists the loss of CO2 as a key risk in its most recent annual report, stating ‘multiple sources of supply are sourced wherever possible’. It said it had added a second supplier of carbon dioxide last year and installed additional carbon dioxide tanks at sites in Milton Keynes and Bellshill.

Britvic manufactures drinks from its sites in UK, Ireland, France and Brazil, and exports to over 100 countries. It is the biggest supplier of still soft drinks in the UK, but also the second largest supplier of carbonated drinks. It also bottles the likes of Pepsi Max and 7UP under long-standing contracts.

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Nichols sells its portfolio of still and carbonated drinks (led by the Vimto brand) in the UK and overseas, but outsources its production to long-term partners.

C&C Group produces cider, beer and soft drinks from two sites, one in Ireland and one in Scotland. In its 2017 annual report it stated it was continuing to recover and recycle CO2 from its cider fermentation production process, which it uses to carbonate its drinks. It has a policy of striking long-term or fixed price supply agreements to mitigate risks relating to the supply of raw materials.

The big alcohol producers look more likely to circumnavigate the supply shortage, with the likes of Diageo focused on spirit production and AB InBev ‘largely self-sufficient’ in CO2 after investing its recovery and recycling capabilities at its two UK production sites.

Meat producers, packagers and distributors hit by shortage

Investors should also keep an eye on those companies involved in the production of meat amid warnings of the impact of CO2 shortages on the likes of poultry production, which needs CO2 to power the guns used to slaughter chickens. Scotland’s largest pig processing plant has said it will suspend operations due to the shortage, shifting livestock to another plant in Manchester. 

This includes companies like Hilton Food Group, which supplies major food retailers across Europe with the likes of roasting joints, steaks, chops and minces. The same goes for the likes of fresh meat and food-to-go retailer, Crawshaw Group, which operates over 50 stores across the Midlands and North of England. 

There is also Greencore Group, the world’s largest producer of pre-packed sandwiches, which has eight food-to-go sites in the UK, and food casing producer Devro, which is known for making sausage skins at sites in Scotland and the Netherlands.

Cranswick, one of the largest food producers in Britain, which promotes farm-to-fork, could also be affected as its product portfolio is led by its pork and poultry divisions. Similarly, Bakkavor Group is also in the fold with the supplier of fresh prepared food producing meals at UK sites, with other operations in the US and China. 

Further down the supply chain there is the likes of Wynnstay Group that supplies animal feed to farmers, making it potentially vulnerable to the impact on meat production. Associated British Foods (ABF), the owner of Primark, also has a large agricultural business supplying a swathe of products to farmers, food producers and drinks industry with facilities in the UK and China.

Supermarkets face empty shelves as CO2 shortage spreads

Supermarkets and other retailers have already reportedly had troubles sourcing some products amid the CO2 shortage, particularly drinks. 

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Some of Tesco's own-branded drinks, like sparkling lemonade, are unavailable on its website (while branded products remain on offer). Morrisons has also noted there are supply issues with certain soft drinks, and highlighted the impact of the issue on frozen foods after suspending deliveries of some products because of the lack of dry ice available, which is also made from CO2. 

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Other grocers like Sainsbury’s and food retailers Greggs could be other stocks worth watching amid the shortage. 

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Pubs and restaurants juggle shortage as demand peaks

The pub and restaurant sector will face similar problems, such as pub operators Fuller Smith & Turner, Greene King and Marston's. The timing is unfortunate, with the sector currently capitalising on the weather and the World Cup, both of which have encouraged consumers to go for a pint. 

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Wetherspoons has already been warned about near-term supplies of beers like John Smith’s Extra Smooth and Amstel by supplier Heineken.

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The true impact isn’t yet known but it’s worth monitoring the situation

While the details about the CO2 shortage are slowly emerging as it ripples down supply chains, it is not yet known how detrimental this will be for the wide array of industries that are being affected, nor how long the shortage will last.

However, it is important to remember that the shortage is primarily down to seasonal shutdowns rather than a lack of production capacity or raw materials, although ammonia and natural gas prices (both of which are also worth monitoring) are not currently helping the situation.

The shortage could be beneficial for those that can demonstrate they have secure supplies, like AB InBev, but is likely to be a major problem for most companies who could see their operations slowly grind to a halt as the CO2 shortage takes hold.

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